01—Abstract
Summary
Summary of the 10-K filed September 14, 2007. Cited figures are marked; the original filing is the authoritative source.
Intuit's fiscal 2007 (year ended July 31, 2007) showed solid top-line and earnings growth, driven by the February 2007 acquisition of Digital Insight and strong performance in its Consumer Tax and Payroll and Payments businesses.
Total net revenue rose 17% to $2.67 billiona, and diluted EPS from continuing operations increased 18% to $1.25. Operating income from continuing operations grew 13% to $637.6 million. Excluding Financial Institutions, revenue grew 11%, which gives a cleaner view of organic momentum.
The balance sheet changed materially. Total assets rose to $4.25 billionb from $2.77 billion, largely from $1.52 billion of goodwill, and the company took on $1 billion of senior unsecured notes (5.40% due 2012 and 5.75% due 2017) to fund part of the $1.34 billion Digital Insight purchase. Cash and investments remained healthy at $1.3 billion, and management expects cash and operations to cover needs for at least 12 months.
The company also has a $500 millionc undrawn revolver and an $800 million remaining share repurchase authorization, having bought back $506.6 million of stock during the year. Investors should weigh several risks disclosed in the filing: intense competition from Microsoft in small business software, government and Free File Alliance encroachment in consumer tax, heavy seasonality with losses in the first and fourth quarters, goodwill impairment exposure, and a pending CEO transition from Stephen Bennett to Brad Smith effective January 1, 2008. Capital expenditures are expected to roughly double to about $300 million in fiscal 2008, which will pressure free cash flow.
02—Key points
Key Highlights
- Total net revenue of $2.67 billion, up 17% year over year; up 11% excluding the new Financial Institutions segment
- Operating income from continuing operations of $637.6 million, up 13%; net income from continuing operations of $443.5 million, up 16%
- Diluted EPS from continuing operations of $1.25, up 18%, aided by a 17.1 million share repurchase for $506.6 million
- Digital Insight acquisition (February 2007) for approximately $1.34 billion, funded by $1 billion in 5.40%/5.75% senior notes, lifting goodwill to $1.52 billion
- Consumer Tax revenue up 15% to $812.9 million and Payroll and Payments up 12% to $516.7 million; QuickBooks up 11% to $598.2 million
- Liquidity of $1.3 billion in cash and investments, a $500 million undrawn revolving credit facility, and $800 million of remaining buyback authorization
- Fiscal 2008 capital expenditures are expected to rise to about $300 million from $153 million, and Stephen Bennett steps down as CEO on January 1, 2008 with Brad Smith succeeding him
03—Questions
Frequently Asked Questions
How much did the Digital Insight acquisition change Intuit's financial profile?
Digital Insight, acquired in February 2007 for about $1.34 billion, created a new Financial Institutions segment that generated $150.4 million of revenue in fiscal 2007 versus $24.4 million the prior year. It also added roughly $1.0 billion of goodwill and about $292.9 million of purchased intangibles, and it lowered segment operating margin to 26% from 50%, since the acquired business has higher costs. Management expects future interest expense on the $1 billion of senior notes to weigh on results.
Is Intuit's balance sheet and liquidity strong enough to support its growth plans?
Yes, based on the filing. Intuit ended the year with $1.3 billion in cash and investments, generated $726.8 million of operating cash flow, and holds an undrawn $500 million revolver that matures in March 2012. Its debt covenants require total debt to EBITDA of no more than 3.25x and EBITDA to interest of at least 3.0x. Management believes these resources cover working capital, capex and contractual obligations for at least 12 months.
What are the biggest competitive and regulatory risks to the core businesses?
The main risks are Microsoft's free small business accounting offering, which pressures QuickBooks and payroll pricing; government-provided free tax filing under the IRS Free File Alliance and California's state-run program, which could erode TurboTax paid volumes; and price pressure from H&R Block and low-cost online competitors such as TaxACT. The filing also flags that the Free File agreement can be terminated by the IRS on 24 months' notice.
Why do Intuit's quarterly results swing so much, and what does that mean for investors?
Tax products drive revenue concentration in the second and third fiscal quarters (ending January 31 and April 30), when quarterly revenue reached $750.6 million and $1.14 billion in fiscal 2007. The first and fourth quarters typically report losses, with fiscal 2007 Q1 and Q4 net losses of $57.2 million and $12.9 million from continuing operations. Investors should evaluate performance on a full-year basis rather than by individual quarter.
What leadership and capital allocation changes should shareholders note?
Stephen Bennett, CEO since January 2000, will step down on January 1, 2008, and Brad Smith, currently SVP of the Small Business Division, will become President and CEO. Intuit paid no cash dividends and retains earnings for the business and buybacks. The company repurchased $506.6 million of stock in fiscal 2007 and had $800 million of authorization remaining, with no repurchases in the fourth quarter.
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